From the September 2008 issue of Boomer Market Advisor • Subscribe!

Annuity carriers overextended?

It's not exactly a new topic, but one that some industry watchers say still hasn't been effectively addressed. Janet Paskin, writing in The Wall Street Journal, once again raises the issue of whether annuity companies have been too generous with their living benefit guarantees.

"Critics wonder where the money to fund the payouts will come from if the underlying investments don't pan out," Paskin writes. "[W]ith the newer annuities, a falling market would presumably hurt all the customers at the same time, leaving the insurers' accounts short of funds to make payments. This has already happened in one case, involving a British insurer that sharply reduced its payments to customers after the company's investing strategies failed."

She then quotes annuity expert (skeptic?) Moshe Milevsky, who says he likes the new products, but believes that even with their high fees, their prices don't cover the cost of protecting investors in a crash.

"These companies are going to have to think more carefully about risk," he says.

Credit-rating agencies are worried as well. Three years ago, credit analysts at Moody's raised red flags, writing in a report that "many companies have not done an effective job of quantifying risk" that the insurance companies were taking on in "plausible" worst-case scenarios.

Today, Moody's analyst Scott Robinson tells Paskin, "we still have the same concerns."

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